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Beware risks of buy-to-let tax break

INTEREST-ONLY mortgages may not be the best option for residential borrowers, but advisers often recommend them to buy-to-let investors because of the tax perks.

Landlords can offset the interest they pay on their mortgage against rental income to reduce the amount of tax they pay.

For example, say you receive £10,000 a year in rent but pay £8,000 in mortgage interest, you would only pay tax on £2,000. Interest-only mortgages enable you to maximise this benefit because the level of debt remains the same. If you opted for a repayment mortgage, the amount of interest you pay, and therefore the tax relief you get, reduces as you pay off the capital.

Many landlords expect to sell their property to repay the mortgage debt, but the Financial Services Authority (FSA) is concerned that they do not fully appreciate the risks. An FSA spokesman said: “Bear in mind that if house prices